HMRC data collection: requests for information and Trust registration

09 June 2020

Tainting protected trusts

From our conversations with Swiss Fiduciaries and from our clients’ experiences it is apparent that there have been a number of HMRC enquiries targeted at settlors of non-UK trusts that benefit from ‘protected’ status.  These enquiries are primarily seeking to understand whether these protected trusts have been ‘tainted’.

Protected status is most pertinent in the context of a settlor interested Trust where the settlor has become deemed domiciled in the UK.  The status was introduced in 6 April 2017 and provides for a favourable basis on which the trust’s income and capital gains are taxed in the UK. 

However, protected status is lost where the Trust is tainted. This occurs when the settlor directly or indirectly makes an addition to the trust, no matter how small, after becoming deemed domiciled in the UK.  It is important to note that there are a number of events that may be treated as an addition to the trust, such as adding property to the structure or making an uncommercial loan to the structure.

Trustees need to take great care to avoid an inadvertent addition to the trust. HMRC are keen to identify cases where this may have happened. Please get in contact with us if you have any concerns in relation to protected trusts and tainting.

Example: Assume Mr X settled a Swiss Trust in 2005 when he was UK resident but non-UK domiciled.  He is within the class of discretionary beneficiaries.  He became deemed UK domiciled on 6 April 2017 but he has not declared any of the Trust’s income or capital gains on his tax return because the Trust has protected status. 

On 6 April 2020, Mr X sells his unquoted shares in A Ltd to the Trust for £1.5m.  There is no market value adjuster clause in the sale agreement.  If HMRC successfully contend that the true market value of the shares on 6 April 2020 is greater than £1.5m then the sale was at undervalue and an addition has been made to the Trust.  Protected status is then lost from the point of sale onwards and the Trust’s income and capital gains may be taxed on Mr X as they arise.

Occupiers of UK property owned by non-UK residents

As you may have read in a previous update, we have seen a number of information requests from HMRC to occupiers of offshore-owned UK properties. These letters ask the recipient to fill in a form by answering a number of wide ranging questions.  The request for information by HMRC is on a voluntary basis, however, in the event that the occupiers do not respond, HMRC has a wide range of investigatory powers to pursue information via information notices. Recipients of the letters and their advisers should carefully review their position to confirm whether they are fully tax compliant in all areas where the information sought by HMRC has a bearing. For example, historic compliance with ATED returns, 10 year charges for Inheritance Tax, and issues around beneficiaries using property rent free should be considered.  Recipients should then seek advice on how best to respond to HMRC.

UK Trust Register

The UK Trust Register was introduced in 2017 and required certain Trustees to provide details of the Trust to the UK on the UK Trust Register.  In general, a registration was required if the Trustee had UK Tax liability (as defined). The EU’s 5th Anti Money Laundering Directive widens the scope of the registration requirement and the Government published a technical consultation in January on the extension.  This consultation invited comments and further clarity on the details should be released later this year.

Even though the final details of how the rules will be applied is not known yet, the Directive will be effective from 10 March 2020 with registration required by 10 March 2022 for those Trusts already in existence and within the scope of the legislation at 9 February 2022.  Trusts established after that date must register within 30 days of establishment or 10 March 2022 (whichever is later).

It seems that all UK express trusts, regardless of whether there is a UK tax liability, and non-EU resident express trusts where they have a business relationship with an obliged entity in the UK, will need to register the Trust with HMRC.

We have had a number of queries from Swiss Fiduciaries with regard to the meaning of business relationship.  The current position is unclear, but HMRC’s view currently is that it includes the use of UK advisers (such as accountants and lawyers) with an element of duration; meaning an ongoing and repetitive nature to the relationship which is expected to last more than 12 months.  This is one of a number of areas that was challenged by the UK’s professional bodies in their responses to the recent consultation on this matter and we await further clarification on the position.  It is therefore still unclear to what extent obtaining advice from a UK lawyer of accountant will be considered to be a business relationship.  

We can help Trustees to understand their likely obligations under these rules and assist with the UK Trust registration process if required.